Board Quality and the Cost of Debt Capital: The Case of Bank Loans

41 Pages Posted: 17 Apr 2010 Last revised: 16 Nov 2011

See all articles by Paige Fields

Paige Fields

University of Kansas

Donald R. Fraser

Texas A&M University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Financial Research Network (FIRN)

Date Written: June 1, 2010

Abstract

We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms with higher quality boards and even a single (non-insider) advisory board member borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection as well as the size and financial characteristics of the borrower and of the loan. We also show that board quality and other governance characteristics influence the likelihood that loans will have covenant requirements, but the relations differ by covenant type. Firms with high quality boards are less likely to have loans with financial ratio restrictions, but the firms are more likely to have such restrictions if they have high institutional ownership. Firms with greater diversity on the board are less likely to have collateral requirements, though these covenants are more likely when CEO cash compensation and institutional ownership are high or when the percentage of incentive-based pay or investor protection are low. Overall, the quality of the board plays an important role in lowering the cost of debt.

Keywords: Board of directors, bank loans, cost of capital

JEL Classification: G21, G3, G32

Suggested Citation

Fields, Paige and Fraser, Donald R. and Subrahmanyam, Avanidhar, Board Quality and the Cost of Debt Capital: The Case of Bank Loans (June 1, 2010). Mays Business School Research Paper No. 2011-3, Available at SSRN: https://ssrn.com/abstract=1590298 or http://dx.doi.org/10.2139/ssrn.1590298

Paige Fields

University of Kansas ( email )

1654 Naismith Dr.
Lawrence, KS 66045
United States

Donald R. Fraser

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-845- 2020 (Phone)

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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